Monday, February 4, 2013

Huawei and ZTE's lawyers fight over acceptance of 100-euro downpayment at German patent trial

With a delay of a few days due to a busy schedule and other circumstances I now finally find the time to report on a Huawei v. ZTE trial I attended in Dusseldorf on Thursday (January 31, 2012). In December I already blogged about a Mannheim trial involving these two companies. The notion of a Chinese-Chinese patent infringement dispute in German courts (as well as in other countries) is truly fascinating.

Even though Dusseldorf is the number one patent litigation venue in Europe by the number of cases filed per year, I didn't previously attend a patent trial in that city. This is due to my focus on the smartphone and tablet computer industry, in which time is of the essence, especially in global disputes that are in no small part a race to the first impactful injunction in a major market. The Landgericht Düsseldorf (Dusseldorf Regional Court) has a first-rate reputation for its competence on patent matters and is statistically very patentee-friendly, but recently it took a year and half or almost two years from filing to trial in that venue, which would be pretty good by U.S. standards but is almost twice as long as in Mannheim and in the faster one of two "chambers" (panels) of the Munich I Regional Court that hear patent infringement cases. The Dusseldorf court is aware of this and has recruited additional patent judges to accelerate the process.

In the wireless-devices context the Dusseldorf Regional Court made worldwide headline news when it ordered a preliminary injunction against the Samsung Galaxy Tab 10.1 in the summer of 2011. That injunction has no commercial relevance left at this stage. Also, it wasn't a patent case under German law: Apple was asserting a Community design, an EU-wide design right that corresponds to a U.S. design patent but is not considered a patent over here.

What sometimes causes confusion among those working on or following German patent lawsuits is that the most prominent presiding judges (judges who chair a panel of three called "chamber") at the Dusseldorf and Mannheim courts share the same last name: "Voß" in German, "Voss" in the English transcription. Judge Andreas Voss (Mannheim) has been mentioned on this blog more than any other judge because of the numerous smartphone patent cases he's already adjudged. (On a per-case basis, Judge Richard Posner is obviously the most frequently mentioned one, in general and on this blog.) Judge Ulrike Voss (Dusseldorf) presided over the two-patent trial I attended on Thursday. She's no less famous in patent law circles.

The Thursday trial was actually the result of consolidation of two trials, one over EP2033335 on a "method for reducing feedback information overhead in precoded MIMO-OFDM systems" and another one over EP2090050 on a "method and apparatus of establishing a synchronization signal in a communication system". Both patents-in-suit belong to Huawei, which claims that implementations of the 4G (LTE) cellular telecommunications standard inevitably infringe on them.

The court raised multiple questions concerning Huawei's infringement contentions for EP2033335, with respect to which I believe ZTE has a fairly strong failure-of-proof argument: ZTE may indeed infringe (Huawei very convincingly explained why), but Huawei's argument based on the specifications of the standard may fall short of evidentiary requirements in connection with a formally optional (though possibly universally-used) element of the standard. Huawei made some great points, but so did ZTE, and in case of doubt I believe there shouldn't be an infringement finding. I somehow felt that Huawei's case is stronger for the other patent, even though Judge Voss expressed a skeptical position at the outset of the trial. The challenge for Huawei on this is going to be to show based on the specifications of the patent that its technical argument concerning fundamental differences between the analog and digital layers of wireless communications is accurate. Both cases are close calls as far as I can see.

After a brief recess the court said that an infringement finding (for at least one of the patents, or possibly both of them) "cannot be ruled out", which required counsel to discuss ZTE's FRAND defense. Suffice it to say here (I may go into more detail after the upcoming March 21 decision) that the Dusseldorf court interprets the European Commission's announcement of a Statement of Objections against Samsung as suggesting that the European Union's top antitrust enforcer seeks to rule out injunctive relief in scenarios in which it would be available under the German Orange-Book-Standard framework, and this may result in a formal question to the European Commission and, if divergences between EU law (which trumps national law) and German law are identified, a referral to the Court of Justice of the European Union. I agree with Judge Voss that Brussels appears to be more skeptical of SEP-based injunctions than German courts have been in recent years.

ZTE raised the usual defense available against standard-essential patents (SEPs) in Germany under the aforementioned Orange-Book-Standard framework: it made an offer to take a license to Huawei's SEPs on certain terms, and it started to act as if already bound to the proposed agreement. The financial terms proposed by ZTE are, however, a tiny fraction ("tiny fraction" being almost an overstatement) of what Huawei would like to receive in the way of royalties. ZTE's derivation of a FRAND rate would result in a per-patent payment for royalties owed so far of only 50 (fifty) euros. Yes, fifty euros.

The Orange-Book-Standard approach requires implementers to make royalty payments or, at least, deposits based on their calculation (always only for past use, not in advance for future use). The idea is that if a would-be licensee does all that is required, injunctive relief can be denied because the refusal of a good-faith acceptable offer by the patent holder would constitute an antitrust violation. In light of this, ZTE sent Huawei a cheque over 50 euros in connection with each patent. What Huawei primarily disagrees with is the amount, but it also criticized many other elements and aspects of ZTE's proposal (which is what SEP-asserting parties always do). Huawei sought to avoid giving any impression of considering the 50-euro-per-patent deal acceptable. Bird & Bird's German antitrust practice leader Dr. Joerg Witting argued FRAND issues for Huawei (Huawei's lead counsel in this dispute is Bird & Bird's Christian Harmsen). He said that Huawei could not be reasonably expected to accept ZTE's offer, and while Dr. Witting was elaborating on this position, he stood up, walked across the room and returned the cheque(s) to ZTE by placing the cheque(s) on the table in front of counsel for ZTE. ZTE's lawyers did not show any immediate reaction.

Huawei's formal criticsm of the cheque(s) was that it could not necessarily even redeem a cheque after a period such as five years. A five-year period was mentioned but not explained in detail: everyone in the room knew that the proceedings might take several years (and if the Court of Justice of the European Union became involved, five years could indeed pass before Dusseldorf court can hand a final judgment).

When ZTE's lead counsel, Dr. Martin Faehndrich of the Hogan Lovells firm, replied to Huawei's Orange-Book-Standard arguments, he also stood up at some point and walked across the room to lay down a 100-euro bill (which he just took out of his wallet) on the table in front of counsel for Huawei. Dr. Faehndrich put on a dead-serious face, though I'm sure the absurdity of the situation was not lost on him. By offering cash instead of a cheque he resolved the redeemability issue Huawei had raised. The amount was, of course, equally far from satisfactory as far as Huawei is concerned. But ZTE simply wanted to demonstrate how low a commercial value it attaches to Huawei's patents-in-suit.

Toward the end of the trial, Dr. Witting delivered the 100-euro bill to ZTE, raising such objections as doubts about the authority of ZTE's lead counsel to make payments on behalf of his client. ZTE countered Huawei's objections and asked the court to take note of this refusal to accept a payment (or deposit). But ZTE refrained from another attempt to deliver.

Patent litigation can be fun to watch.

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About Me

Florian Mueller is a former award-winning intellectual property activist with 25 years of software industry expertise spanning across different market segments (games, education, productivity and infrastructure software), diverse business models and a variety of technical and commercial areas of responsibility. In recent years, Florian advised a diversity of clients on the patent wars surrounding mobile devices, and on their economic and technical implications. (In order to avoid conflicts of interest, Florian does not hold or initiate transactions in any technology stocks or derivatives thereof.) He is now developing a game app for smartphones and tablet computers.